How Do I Invest in Bitcoin?
Bitcoin, the largest, most established, and most widely accepted cryptocurrency in the entire world has taken investors’ interest by storm. But which is the best way to invest? Luckily, with Bitcoin being traded all over the world and gaining popularity, there are many ways to invest in Bitcoin and most allow you to link your bank account. There are advantages and disadvantages to each investment vehicle, so let’s lay them out and go over some key points to consider to buy bitcoin holdings and selling bitcoin.
BUY ACTUAL COIN ITSELF
There is no firm coin that you can put in your hand, but you can buy actual Bitcoins, the digital currency. Through certain brokers, once you fund your account, investors can exchange other currencies for Bitcoins. These are the assets investors can put in their digital wallets if they decide and these are the, as far as cryptocurrencies are concerned, the actual asset that holds value.
- Usage – Perhaps the best thing about the purchasing of actual coins and getting into the cryptocurrency space is the fact that it is, indeed, a currency and is accepted as a medium of exchange to a rapidly growing community. Bitcoins can be used to purchase food, cars, clothing, vacations/trips, electronics, art, education, and services ranging from movies to funerals to sporting events.
- Authority – There is no central authority! There is no bank or institution that can freeze your assets, if you assets are Bitcoins.
- Portions of Coins – Investors do not have to commit to obtaining an entire coin, but can buy what is called a Satoshi. A Satoshi is a small percentage of a coin, where 100 million Sotochis is worth 1 bitcoin.
- Liquidity – Being an international market where Bitcoins can literally be transferred to anyone, anywhere in the world, if an investor decides to exit their position or exchange their Bitcoin for something else, the flexibility in that happening flawlessly is getting better and better.
- Stability – It may not seem like Bitcoin is stable, especially from a trader or investors’ perspective, but lot of future unknowns have less of an impact on Bitcoin than other stores of value. The only thing that makes any store of value worth anything is what it is backed by. Gold for example is backed by the physical gold itself, which many cultures from around the world have viewed as valuable for millennia. The US Dollar or Japanese Yen are backed by their respective governments and real estate is backed by the potential use of the property. Bitcoin is backed by the growing, international super-computer created by blockchain technology which only gets more complex and credible as more people use it.
- Storage can be done in what is called hot wallets, which are typically used for those who actively trade cryptocurrencies, and cold wallets are more used for storage of coins for a longer period of time or for larger positions. There are many Bitcoin wallets out there, make sure you find one that suits you best when you get a Bitcoin wallet.
- No Compounding – If an investor is looking to accumulate and watch their investment grow (or shrink) faster than what the market is actually providing, with the purchase of actual coins, that is quite difficult. Most cryptocurrency brokers do not offer leveraged trading in the US and the only way to increase the size of one’s position is to literally purchase more.
- Surprise Regulations – Cryptocurrencies are relatively unregulated and governments can issue surprise regulations seemingly out of nowhere. These regulations can actually be in favor of or against Bitcoin.
The way that Bitcoins come into existence is through a process called mining. Investors can purchase or develop and purchase programs and entire machines that mine Bitcoins. Miners can even set up their smart phones to mine Bitcoin.
- Inability to create counterfeit coins – It has been tried by many hackers and counterfeiters, nobody has been able to create a counterfeit Bitcoin to date. So, miners are the only ones who are putting Bitcoins into existence.
- Stability – In an asset that is rather volatile, mining can be relatively stable. An investor can set up a mining station and pretty steadily get paid in Bitcoins.
- Accumulation of Coins – As the mining process continues, investors can continue to mine coins even without expanding their operation or putting up any more funds other than towards operating expenses. For example, if someone sets up their mining to mine 1 Bitcoin a month, then this equipment will continue mining 1 Bitcoin a month if all things are held constant.
- Pools – There are groups of miners that add computing power to a group of miners, called pools, who distribute percentages of mined coins proportionately. A nice option to have for those who do not want to go about it themselves.
- Upfront Costs – When someone decides to become a Bitcoin miner, they must realize that there is an upfront cost. The equipment used to perform the mining must be purchased, set up, and running for a period of time prior to accumulating even fractions of Bitcoin.
- Energy Usage – Like all machines, Bitcoin mining equipment uses electricity and creates heat. Electricity consumption through the computing mining process and cooling process can add up. Many miners have their mining stations located in places that do not get too hot, so they can just open the windows to keep the machines cool, and use their own electricity production from sources such as wind, hydro, and solar power to keep energy cost low.
- Competition – Particularly as the value of Bitcoin increases and they are available to more individuals, more miners are naturally in the game. This means that the investor who has the most productive software, hardware, and operations will produce proportionately more Bitcoin.
- Computer Obsolescence – Computers become less expensive and more capable with time. This means that a computer that is top of the line for mining now will likely not be as efficient in a year or two.
- Fraud – Bitcoin and the world of cryptocurrencies is international, relatively unregulated, and been around for a much shorter time than stocks, bonds, and commodities. Sometimes mining pools (groups collaborating to mine Bitcoin) and certain pieces of equipment are very compelling that they are legit, but can run away with investors’ money.
STOCK MARKET, FUNDS
One of the more traditional ways to invest in anything is through the stock market. Mutual funds, Exchange Traded Funds, Trusts, and even certain company stocks have a Bitcoin holding. For example, a mutual fund may dedicate a certain percentage of their fund to Bitcoin or a company that makes cars may move excess cash to a Bitcoin position, which still affects the bottom line. In both cases investors gain Bitcoin exposure.
- Established – The stock market is established, regulated, and has rules in place that must be acknowledged.
- Transparency – Funds must report what their allocations are in the company prospectus.
- Liquidity – Generally speaking, stock and fund positions can be entered and liquidated with ease during market hours.
- Insurance – All registered brokers are insured through SIPC by law, with only a few exceptions.
- Safety – Depending on the size of the account, this may be the best way to practice safe storage. Stocks, ETFs and mutual funds are all covered by SIPC (Securities Investor Protection Corporation) which is a federally mandated US corporation purposed to expedite the return of customer cash and assets during the liquidation of a firm that goes out of business.
- Leverage – Most brokers offer margin accounts for leverage trading to their clients, which allows investors to take a larger position than they have the money to fund.
- Mirroring – It is likely that bitcoin value in the stock market will not exactly mirror the international, ongoing price of the actual Bitcoin currency. Stocks and funds are generally traded in specific markets and may not exactly mirror the true exchange rate.
- Fees – Since the positions may be through a fund or trust, there may be associated fees. Be sure to know what they are prior to making an investment.
- Time – The cryptocurrency markets are international and move all day, every day. The US stock market is only open for trading from 9:30am to 4pm New York time, and is closed on weekends and most US holidays.
Many investors associate the futures market with commodities, but there are also contracts available for trading Bitcoin. Futures contracts ensure that investors can enter a futures position and may execute the delivery of the product in the future. For example, an airline company may buy oil futures to ensure that they get fuel at a specific price six months from now. It works the same way with Bitcoin futures.
- Established – Bitcoin futures are traded through the CME Group, the largest futures exchange in the world, consisting of CME, CBOT, NYMEX, COMEX KCBT and NEX Group.
- Treated Like Other Futures – As far as how the product is traded, Bitcoin futures contracts are contracts for exchange of a value of Bitcoins at some specified point in the future.
- Leverage – Bitcoin futures contracts are leveraged, so an investor can own control over Bitcoin value with a fraction of the funds needed to actually trade the true value.
- Liquidity – Futures trade from Sunday evening to Friday afternoon. So, they are not quite as liquid or available for trading as Bitcoin itself on a cryptocurrency exchange, but more liquid than if one decides to invest in stocks, funds or mining.
- Always Leveraged – When trading or investing in futures, there is no option to not use leverage. Bitcoin and other cryptocurrencies are volatile assets and account sizes change even faster with leverage.
- Cannot Liquidate Over The Weekend/Holidays – The futures market is open from 6p EST on Sunday evening to 4p EST Friday afternoon and is also closed on major holidays. Futures have more trading hours than mutual funds and stocks, but fewer than the cryptocurrency exchanges.
- Can Only Trade Specified Contracts – Futures contracts are specific sizes, and in the case of Bitcoin, are good for five Bitcoin. Micro contracts are available and are traded in increments of 1/10 of a Bitcoin. This is much larger than the 1/100,000,000 of a Bitcoin value of the Sotochi.
- Rollover – Futures contracts are designed to have something delivered. In this case, the delivery of Bitcoin. If an investor desires to hold a position for a period of time beyond when the contract they own expires, they will have to rollover their contracts.
So, as there are multiple ways to invest, there are also multiple ways to invest in Bitcoin. Weigh the pros and cons for yourself and let your trading reflect your style, which may even take time to develop.